Budget airline Allegiant Travel Company (NASDAQ: ALGT ) has a lot of unhappy customers right now. On Sept. 20, Allegiant decided to ground the majority of its fleet of MD-80 aircraft after discovering that it had not been inspecting the emergency evacuation slides as often as the manufacturer recommended.
Allegiant is doing its best to accommodate passengers by adding flights on its remaining jets, renting extra planes to fill in the gaps, and by offering relatively generous compensation to travelers who have been inconvenienced. Nevertheless, there will inevitably be some customer backlash. Furthermore, the cost of compensating passengers and rescheduling flights will result in a significant hit to the company's bottom line this quarter.
That said, Allegiant's current troubles could create a good opportunity for long-term investors. Allegiant faces little or no competition on most of its routes. Since most of its customers have no good alternative, Allegiant is unlikely to see a significant long-term impact in terms of its popularity or profitability.
Allegiant's recent troubles began with an emergency evacuation conducted on Sept. 16. While reviewing the incident, Allegiant's maintenance personnel learned that while the manufacturer recommended inspecting most slides once every three years, it recommended annual inspections for slides more than 15 years old, as are Allegiant's.
Since Allegiant had been on a three-year inspection cycle, more than half of its evacuation slides had not been inspected in the past year. Moreover, the slides need to be sent out to certified facilities for inspection, which is expected to take five days. As a result, about half of Allegiant's total fleet will be out of commission until later this week.
One of the unique aspects of Allegiant's operating model is that it has a much lower aircraft utilization rate than other airlines. As a result, the carrier has been able to avoid canceling many flights; Allegiant has simply added more flights to the schedules of its remaining aircraft. The company has also rented seven aircraft from other carriers to supplement its own fleet while the inspections are ongoing.
But operating a full schedule with half as many planes brings its own challenges. On Friday, Sept. 20, Allegiant only canceled two out of its 121 scheduled flights, but 16 others were delayed by a full day, while another 22 were severely delayed due to aircraft availability issues.
Saturday is a much lighter travel day, which allowed Allegiant to catch up on the backlog from Friday. But on Sunday, Sept. 22, the carrier had to cancel another two flights while postponing 20 others until Monday. Meanwhile, a dozen flights originally scheduled for Monday were pushed back to Tuesday (another light travel day).
While the disruption at Allegiant was widespread over the weekend and will remain so for the next few days, I expect the airline to recover quickly. Allegiant has stated that the slide inspections will be completed by the end of September, allowing all aircraft to return to service.
The impact to Allegiant's bottom line will also be mitigated by the fact that September is a trough period for leisure travel. As a result, the carrier's flight schedule is at its lowest level of the year. In fact, on average, Allegiant's aircraft were expected to operate for less than four hours per day during September.
Furthermore, by design, Allegiant faces very little competition. On more than 90% of its routes, Allegiant is the only commercial airline offering nonstop flights. While potential customers may be upset by this week's incident — and other reliability issues — most Allegiant origin cities have little or no other airline service. Allegiant is therefore unlikely to experience a long-term drop in traffic.
Allegiant's long-term growth trajectory and the company's fanatical commitment to keeping costs down have made it one of the biggest success stories in the airline industry during the past decade. This week's operational problems are unlikely to break Allegiant's momentum. If Allegiant stock continues to pull back, it could create a nice buying opportunity for investors who have missed out on the stock's run.
The 2 best airlines
Airline stocks hold great promise for savvy investors... but also great danger. The Motley Fool's new report on the airline industry highlights two promising airlines poised to navigate these treacherous waters. Click here to learn how these two airlines are leading a revolution in their industry, and discover whether they can keep delivering big gains for shareholders. Your copy is free today!